Bounds Testing Approach to Find the Impact of Capital Inflow on Real Output Growth of Pakistan

Nazima Ellahi

Abstract

The dollar recipient countries of the world utilize the funds to augment their developmental activities, curtail balance of payment distortions, enhance the pace of economic growth, and alleviating poverty. Capital flows into these economies, in two forms, firstly foreign direct investment and secondly, in the form of foreign aid. However, the present study is, mainly, conducted to check the impact of Foreign aid (FA) and foreign direct investment (FDI) on real output growth of Pakistan. To test the empirical relationship, the study utilized annual time series data set over the period 1970 to 2010. Econometric techniques include testing the stationarity of data by applying augmented Dicky Fuller (ADF) test and applying Autoregressive Distributed Lag (ARDL) method of estimation. Moreover, Short run and long run estimates were found. The findings suggested a robust and direct link between economic inflow of foreign capital and economic performance indicators. However, the magnitude of foreign aid impact was explored considerably low as compared to FDI. In the end, it is suggested that though impacts of capital inflows are positive but economies must rely upon the indigenous resources to promote development rather depending on external factors.

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